Macroeconomics: Performance and Stabilization

1. Macroeconomics: Performance and Stabilization Unit 4 Chapters 12 and 13

2. Measuring the Nation’s Output and Income Chapter 12 Section 1

3. Starter • GROSS DOMESTIC PRODUCT – THE MEASURE OF NATIONAL OUTPUT. • In 2009, the United States GDP measured $14.26 Trillion. (CIA world Factbook) • (GDP Per Capita of 46,400 – down from $48,000 in 2008) • China’s GDP in 2009 was $4.8 Trillion (but their currency is considered undervalued. In U.S. dollars, it is $8.789T • (GDP Per Capita of $6,600) • Why is China’s Per Capita so much lower than the that of the U.S. when the total difference is less than $9 trillion?

4. What GDP Is • (Pages 318-322) • GDP – Gross Domestic Product – is a measure of national output. • Japanese cars built in the U.S. count toward the U.S. GDP. • U.S. owned plants located in Mexico or other countries do not. • It is figured by multiplying all final goods and services produced in a 12-month period by their prices. • What’s included? • All new (final) goods, services and structures.

5. Quick Group Activity • You have 30 seconds to get into groups oftwo. • You will have 5 minutes to list, in order from #1 to #10 the top 10 individual national economies in the world. If they read Chapter 12.1, you should know nine of the 10. Just go straight GDP. • Cell phones / books prohibited • Perfect scores get 5 extra credit points • Each group must write their top 10 on the board.

6. Answers (CIA World Factbook) • 1 United States14,430,000 • 2 Japan5,108,000 • 3 People's Republic of China4,814,000 • 4 Germany3,273,000 • 5 France2,666,000 • 6 United Kingdom2,198,000 • 7 Italy2,090,000 • 8 Brazil1,499,000 • 9 Spain1,466,000 • 10 Canada1,335,000

7. What’s Excluded from Figuring GDP? • Intermediate goods: • Products used to make other products already counted in GDP. Or something that is already part of the product. • EXAMPLES: • Factory Tires on a new car. • Processors on a computer. • Sugar used in the process of baking brownies. • QUESTION: Do aftermarket tires and upgrades count in GDP? Should they? • Secondhand sales • Sales of used goods. • Re-sold Houses, Used Cars, used CDS. • Nonmarket Transactions: • Things you do yourself: • Mowing the lawn, cooking your meals, cleaning your clothes. • Underground activity: • Illegal: Drugs, Prostitution (except in Nevada), gambling, counterfeiting. • Legal: Bake sales, flea markets, garage sales

8. Figuring the Underground Economy

9. Analysis • At 8%: The U.S. Underground Economy is $1.168 Trillion (12th largest in the world) • At 10%: $1.426 (10th Largest in the world) • Question: Why would some nations have higher rates of Underground Economies?

10. Real GDP • To evaluate GDP over time – to see if an economy experienced growth or loss, you need to find a common starting point – a BASE year. • GDP can be measured used current dollars, or in the dollars for the base year. • BASE YEAR: IS REAL GDP. • CURRENT GDP – based upon prices that existed in those years. • GDP tells nothing about the following: • the composition of output (What companies and products make up the economy) • or the impact of production on quality of life. (For example, are 10,000 new homes going to force the extinction of a rare bird species) • Despite its limitations, GDP is still the best measure of overall economic health. • QUESTION: What does an increase in GDP indicate?

11. GNP – The measure of National Income • GrossNational Product (GNP) is the measure of national income. • MEASURE IN ONE YEAR:GNP is equal to GDP plus all payments that Americans receive from outside the United States minus all payments made to foreign-owned resources inside the United States. • GDP + Payments from outside U.S. - Payments made to foreign-owned resources inside U.S. = Total GNP

12. Net National Product • Net National Product (NNP) is equal to GNP minus depreciation. • Depreciation represents the capital equipment that wore out or became obsolete during the year. • National Income (NI) is equal to NNP minus all taxes paid by businesses other than the corporate profits tax. • Personal Income (PI) is the total amount of income received by individuals before taxes. • Disposable Personal Income (DI) is PI, minus taxes. • QUESTION: Which measure of national income would you be interested in if you were trying to forecast the sales of consumer goods.

13. Economic Sectors and Circular Flows • The economy consists of several different parts – or components. • TAKE A LOOK AT THE CHART ON PAGE 325. • CONSUMER SECTOR: (C) • Largest sector in the economy. • Basic unit – the household – consists of all persons who occupy a house, apartment, or room that consists separate living quarters. • Include related family members and all others who share a living quarters. • INVESTMENT SECTOR (I) • Businesses, companies • GOVERNMENT SECTOR (G) • FOREIGN SECTOR (X-M)

14. The output-expenditure model: GDP = C + I + G + (X – M) • Net export on goods and services is written as (X – M).

15. Poverty and Distribution of Income Chapter 12 Section 3

16. Poverty • About 1 in 8 people in the USA lives in poverty – • some of them are what is called the “working poor” – those who do not earn enough to feed and care for their families even though they are employed. • The Census Bureau's most recent poverty report is for 2009, and was issued in September 2010. The poverty threshold varies based on age and size of family. • Individuals and families that fall below the poverty threshold are considered to be living in poverty. • For example, for a four-person family unit with two children, the 2009 poverty threshold is $21,756. • Poverty thresholds are used to create poverty guidelines. These guidelines are used to determine what assistance an individual or family is eligible for (things like Food Stamps and Head Start).

17. 2011 HHS Poverty Guidelines

18. What causes incomes to be unequal? • Education – more you have the higher your income tends to be • Wealth – when people or households are organized from most to least wealth – the top 1/5 control over 75 % of the country’s wealth. The bottom 2/5th (40% of the country) control less than 2%. • Ask – how does having wealth to start with assure that you will keep it? • Better education • Ability to invest to make money even without a job • Tax Law changes – the changes in taxes have benefitted everyone – but not equally. Those who are in the wealthiest have benefitted the most from tax law changes • Decline of Unions – union jobs are fewer and non-union, non-professional work is the lowest paying job market.

19. What causes incomes to be unequal? • More Service Jobs (sales clerk, waitress, etc.) have replaced the unskilled manufacturing jobs (factory workers) – these service jobs are lower paying. • Monopoly Power – some groups have been able to limit the number of people able to work in their field and therefore kept wages for that group very high. Doctors for example – only a certain number of certifications are allowed by the AMA. • Discrimination – while illegal – it would be foolish to think this doesn’t keep wages for women and minorities lower than wages for white males. • Changing family structure – the increase in single parent households has worked to decrease the average American income.

20. What do we do about poverty? • Income assistance – direct payments to families that meet the criteria • General assistance – non-cash assistance such as: • Food stamps – coupons that can be redeemed for food at most stores that sell food • Medicaid – medical insurance for the poor, disabled and visually impaired • Social Service Programs – varies widely from state to state but can include foster care, family planning, job training, etc. • Tax Credits – a credit on your federal income tax that relieves some of the burden of individual income tax payments taken out of your payroll check. May result in a tax refund (transfer payment).

21. What do we do about poverty? • Enterprise zones – tax credits given to businesses to locate in depressed areas. (There are enterprise zones in Detroit) • Workfare – working a government job (sanitation, highway clean-up) to earn your assistance. Sometimes businesses are given special tax incentives to hire people from off the welfare roles which works well for both employer and employee. • Negative income Tax – not currently used but would eliminate welfare programs. People who qualified would pay NO income tax and would get funds from the government if they fell below a certain poverty limit. • Bottom line – even with a growing economy and government assistance we have done little to reduce poverty.